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Natural Remedies Private Limited vs. Assistant Commissioner Of Income Tax - (Income Tax Appellate Tribunal) (01 Jan 2021)

Once Research and Development facility is approved by prescribed authority, expenses incurred has to be allowed under Section 35(2AB) of IT Act


Direct Taxation

The assessee is a private limited company and engaged in the business of herbal veterinary medicines and export of herbal extracts. For the assessment year 2016-2017, the return of income was filed declaring total income of RS.23,15,69,790. Subsequently, the income was revised by filing a revised return of income declaring total income of Rs.22,85,89,280. In the return of income, the assessee-company had claimed research and development expenses of Rs.3,17,63,251, however, DSIR allowed expenses to the extent of Rs.2,74,51,209. The assessment was taken up for scrutiny by issuance of notice under Section 143(2) of the Income Tax Act, 1961 (IT Act) and the scrutiny assessment was completed vide order under Section 143(3) of the IT Act, wherein the Assessing Officer based on Form No.3CL, added back a sum of Rs.43,12,042 to the income of the assessee.

Aggrieved by the order of the Assessing Officer in disallowing the claim of deduction under Section 35(2AB) of the IT Act, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the view taken by the Assessing Officer.

Admittedly, the assessee has in-house Research and Development facilities which is approved by the Department of Scientific and Industrial Research (DSIR) and was entitled to deduction under Section 35(2AB) of the IT Act. The Assessing Officer disallowed the deduction to the extent of Rs.43,12,042 on the ground that, DSIR has not approved the expenditure in Form 3CL. The CIT(A) confirmed the disallowance. Further, the CIT(A) in the impugned order had stated that, deduction under Section 35(2AB) of the IT Act is not allowable to the extent of Research & Development activity carried outside the in-house R&D facility of the assessee. There is no finding given in the assessment order that expenditure related to Research & Development activity carried out outside in-house R&D facility of the assessee is claimed as deduction under Section 35(2AB) of the IT Act. Therefore, findings of the CIT(A) are not tenable.

As per Section 35(2AB) of the IT Act, the DSIR is empowered to approve only R&D facility and not the expenditure. In other words, once the R & D facility is approved by the prescribed authority, i.e., DSIR by issuing Form No.3CM, the expenses incurred by the assessee have to be allowed under Section 35(2AB) of the IT Act.

If the law wanted the expenditure to be approved by the prescribed authority, same would have been expressly provided. For the purpose of section 35(2AB) of the IT Act, it is provided that, facility is to be approved and not the expenditure. Nowhere under the Act, it was stipulated that, the deduction under Section 35(2AB) of the IT Act was allowable year after year only after approval by DSIR in Form 3CL.

In the present case, since the deduction is with reference to assessment year 2016-2017 (where the law applicable is the 1st day of April, 2016), which is prior to the Income Tax (Tenth Amendment) Rules, 2016, with effect from 1st July, 2016 of Rule 6(7A) of the IT Rules, deduction under Section 35(2AB) of the IT Act has to be allowed on the basis of the expenditure as recorded by the assessee in the books of account. Admittedly, the Assessing Officer has not disputed the correctness of the claim of expenditure incurred on Scientific Research. The co-ordinate Bench of Bangalore Tribunal in case of Mahindra Electric Mobility Ltd. v. ACIT and M/s.Indfrag Limited v. ACIT have clearly held that, prior to 1st July, 2016 Form 3CL has no legal sanctity and it is only w.e.f. 1st July, 2016 with the amendment to Rule 6(7A) of the IT Rules, that the quantification of weighted deduction under Section 35(2AB) of the IT Act has significance. Therefore, the deduction under Section 35(2AB) of the IT Act be granted as claimed by the assessee. The appeal filed by the assessee is allowed.


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